March 01, 2022 (MLN): Fitch Ratings, in its latest report issued yesterday, has affirmed Pakistan's Long-Term Foreign-Currency Issuer Default Rating (IDR) at 'B-' with a Stable Outlook.
“Pakistan's rating reflects external vulnerabilities, a narrow fiscal revenue base and low governance indicator scores, with GDP growth and most public finance metrics largely in line with peers following a rebasing of GDP,” the rating agency said.
In addition, recent reforms include measures to improve public finances and amendments to the State Bank of Pakistan (SBP) Act, which could further entrench the policy shift in recent years towards greater central bank independence and a market-determined exchange rate, bolstering Pakistan's resilience to external shocks.
However, the rating agency said that a challenging external backdrop of high oil prices and global monetary-policy tightening poses risks; while political pressure could blunt reform momentum, particularly with the conclusion of the IMF programme in September 2022 and elections due by mid-2023.
The report noted that risks from a widening current account deficit are likely to remain manageable in light of policy tightening, though sustained high oil prices pose a clear downside risk. Fitch forecasted the deficit to widen to around 4% of GDP in the fiscal year ending June 2022 (FY22), from 0.6% in FY21. Import pressure should ease from 2HFY22, reducing the deficit to 3.0% in FY23, the report said.
As per the report, remittances are expected to remain elevated at current levels over the next couple of years. Strong export performance should also continue, but this comes from a low base.
The report estimated that foreign exchange reserves, including gold, will remain stable at around USD23 billion (3.2 months of current external payments) over the next couple of years, as debt repayments have offset inflows. This is about USD11 billion above 2019 reserve levels. The commitment to a market-determined exchange rate limits downside risks to reserve.
Pakistan faces annual external debt repayments of about USD13 billion-14 billion, including a cumulative USD3.8 billion in international bond maturities, through FY26. The current account deficit and foreign-currency reserve build-up have largely been debt-financed, although authorities have diversified funding sources and extended maturities, it added.
With regards to fiscal deficit, Fitch said that it will fall further to 5.6% in FY22 and 4.7% in FY23, from 6.1% in FY21, on the back of revenue reforms passed in the recent supplementary budget and planned for the FY23 budget. These measures could put public finances on a more sustainable footing. However, high-interest payments, which we forecast at 35.6% of revenue in FY22 ('B' median: 11.5%), constrain fiscal flexibility.
On the debt front, the report forecast general government debt to decline to around 70% of GDP in FY22, which is the 'B' median, from about 72% in FY21, and to remain on a downward trend to 62% by FY26. This is supported by the narrowing fiscal deficit and high nominal GDP growth. Pakistan's debt/GDP ratio dropped by 11.8pp following a GDP rebasing in FY21, from a pre-rebasing level of 83.6%. However, as a share of the revenue. Fitch precited elevated debt of 518% in FY22, compared with a 'B' median of 320%.
Fitch forecast Pakistan’s GDP growth of 4.5% in FY22, slowing modestly from 5.6% in FY21 due to sound manufacturing performance and a continued recovery in consumption, as Covid-19 pandemic-related challenges recede. The slight deceleration in the growth rate reflects base effects and the impact of fiscal and monetary policy tightening, the rating agency said.
However, high inflation poses a downside risk to the macro-outlook, it said, adding that the economy is likely to expand by 5% in FY23 and over the medium term.
Furthermore, Rs187.5bn worth of deposits were held with post offices, up by 31%YoY and 4% MoM, while National Saving Schemes held Rs3.7tn, marking a decline of 7% YoY whereas, on a monthly basis, it remained stable.
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